Game On?

The commuter trains were noticably fuller this morning as the passage of the August bank holiday signals the onset of autumn and full staffing levels. With Labor Day on the horizon, there are likely to be another few days of liquidity impairment and potentially sluggish trade, but for all intents and purposes it is tempting to put one's hockey net in the street and yell "Game on!"

It was a year ago tomorrow that Macro Man scaled into equity shorts at elevated levels, and sure enough, 52 weeks on, major indices are once again at localized highs (but running out of steam.) We're now a month away from National Day in China, the trigger date that Macro Man had circled in his calendar for fireworks.

It seems as if the (pity) party has started early, however, as Shanghai has extended its early-August weakness to lapse back into a bear market. Recent confirmation that whenever you trade with China, you're actually selling them a free option is clearly not the best of news, and we surely must be close to the point where the man on the street starts selling with greater vigour.And while it is oh-so-tempting to suggest that this spells doom and gloom for the SPX, SX5E, and the like, Macro Man has finally thrown up his hands in final, utter, complete disbelief and lack of understanding at what's going on in developed market equities.

In yesterday's fairly lackluster session, Lehman Brothers-Lehman Bloody Brothers!-stock traded 125 million shares, rising to 18c. In the last two sessions, that share price has more than tripled. Now, Macro Man gathers there is some stuff going on with respect to the vultures picking over the carcass of LEH, fighting for scraps. But he cannot think of any rational reason in the world why anyone would want to buy Lehman common stock....hell, until yesterday's move was pointed out to him, he didn't know that Lehman stock still existed! Gee, he wonders if he can get a quote on Enron or Penn Central...Meanwhile, US equity volumes are being dominated by what can only be termed as a "cavalcade of turds." Macro Man recently highlighted the surge in volume in the Agency stocks....evidently the same thing is going on in Citi (though at least there, there's been a recent conversion of prefs to common.)

So while he likes the short equity trade (what else is new?), at the moment his risk allocation is relatively modest. One of his investment maxims is that it's virtually impossible to forecast what you're going to see if you can't even explain what you're currently seeing. And while it's tempting to strap on a big short in stocks given the waning momentum and ancillary signals from bonds and EM, this bizarre activity in the low-grade financials is preventing him from saying "game on!"

31
comments

Getting a cohesive picture of what is going on is not easy right now but I think its worth pointing out that onshore local Chinese liquidity conditions have almost nothing to do with everywhere else in the short run. What the PBOC does has very little impact on everywhere else in the short run which makes that kneejerk selloff yesterday a bit odd (but welcome).

Nemo, you know I'd fire you up if I had seen it through you. But a reader actually sent me the story on Friday evening. Ordinarily I would have written about it yesterday, but in my view sunny (ish) bank holiday weekend activities should be dedicated to bike rides through the North Downs, consumption of adult beverages, and poetry of dubious artisitic merit only...

Nemo, while I broadly agree that what the PBOC does should not have too much direct impact everywhere else, it (obviously) has had some impact on risk appetite.

The broader implication is that with just talk of tightening, the market has taken a bath. Imagine what will happen when China (and or other CBs) actually start to tighten.

The phantom tightening also may have caused some investors in emerging markets to take profits/sell. EMs were extremely overbought and valuations back to 2007 peaks (based on forward earnings - for what they are worth).

Had felt this was all a bit tinfoil hat till your sighting of the newly animated corpse that is LEH but Bret Steenbarger posited the view Saturday that this may be some sort of under the radar capital infusion. http://traderfeed.blogspot.com/2009/08/recent-concentration-of-volume-in.html

Not ruling out a last low volume run by the bulls at SPX 1050. The ADP may be a mellow number in the morning. We are not anxious to encounter a steamroller headed north in the middle of this week. But we do feel a change in the weather is close at hand, and note that Pimco is essentially predicting that credit spreads will widen into the Fall:http://www.bloomberg.com/apps/news?pid=20601087&sid=ag343PW1Tq5U

i have recently (last month) noticed a significant increase in "Lease for sale" or "Commercial property for rent" notices in the main shopping streets above the shops, even in the higher grade areas that are stuffed full of shops that sell useless, overpriced crap to the yummy mummies.

green shoots in the UK? you must be kidding. presuming that the double whammy of curtailed overdraft facilities from banks and slowing trade is killing a lot of the marginal businesses.

of course you could say this is small sample anecdotal crap...but it is interesting. tail end of a crunch or just the beginning of another...

Same old story everywhere - gotta wonder where all the commods demand is going to come from now that nothing is getting built in the developed world for a few years.

Oh, that's right, China building affordable housing in cities which cannot provide its citizens jobs because all the bank credit goes to hopeless SOEs = DIY favelas. That plus an infrastructure boom is the only thing backing up copper, ali and the like.

I recently watched Orfeu Negro - its interesting to see Rio in the 60s before the favelas when migrant workers came from the Northeast to the cities for work. If China keeps this up it too can have 20 years of history go MIA in inflation and bureaucratization.

This stuck at 1000 is rather interesting. No real power hear to go down unfortunately. Hope this will last at least to AUD GDP this night in order to receive the number in pessimistic mood. Carry trade pairs seem to have some dirty upside beta at the moment and they are definitely place to be if SP fails to break this level.

Another thing, I might be pretty late, but - what is this crazy sugar theme about? It looks so bubblicious.

Give it a few years and a tsunami of defaults will hit China. At that point we will find out about a gigantic systemic risk created by companies and sovereign wealth funds that leveraged on the China bet. By the end of the next decade China shall be viewed as one of the biggest fads in history.

For anyone trading the AUD, note that nominal GDP actually fell 1.5% quarter-on-quarter (not annualized) due to a sharp 2.2% fall in the deflator. Also, note that the contribution from inventories was+0.6% (headline GDP was +0.6% in Q2). Fiscal stimulus has probably brought forward activity into the first half of 2009.

Actually, CLSA has given up the number and it has been taken over by HSBC. The CLSA PMI would be henceforth known as HSBC PMI. It had come out at 55.1 yesterday, even higher than the official PMI. The data is computed by Markit and is the source release http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=5451